Hotel Management Contracts with International Brands Keep Rising

How Beneficial Will They Be?

Hotel management contracts are arrangements in which an international hotel company (the owner) agrees to give a company operational control over a hotel (the operator) in exchange for a fee. These contracts are often beneficial for developing countries, as the owner often assists in the development of the hotel. Some, however, say they may hamper the work of small, local hotels. EBR’s Tamirat Astatkie spoke with a number of stakeholders to explore the potential promise and pitfalls of these agreements.

Wyndham Hotel Group is one of the world’s largest hotel companies, operating approximately 8,000 hotels under 16 brands. Part of Wyndham Worldwide Corporation, Wyndham Hotel Group has entered the Ethiopian market with the Ramada brand, after it signed a management agreement in 2014 with ADM Business, a company that was established to diversify their parent company, Get-As International’s, foray into the hospitality sector with the establishment of the Ramada Addis, which is Wyndham’s first hotel in Africa.
The 136-room Ramada Addis, constructed by ADM Business, is located off Africa Avenue, two kilometres from Addis Ababa Bole International Airport, within seven kilometres of the African Union and five kilometres from the UN Economic Commission for Africa Conference Centre. “We were able to make USD400,000 revenue in two months since we started operation, which is a good sign for the prospects of the hotel sector in Ethiopia,” says Ronald Garoute, General Manager of Ramada Addis. “As a brand we are immediately recognised for high standards, quality as well as value for money, and we have installed ourselves in the front row with a very good base.”
Due to its success in the local market, the Wyndham Hotel Group considers Ethiopia an especially promising country for hospitality industry investments. As a result, they have signed three more management contracts, all of which will be ready for operation within two years.
According to the agreement, which was signed between Wyndham and Santa Maria Real Estate and Hotels, three additional hotels will be built in Ethiopia: a four-star and five-star hotel, each along Bole Road, as well as another four-star hotel in Langano, a lakefront tourist area located 180km south of Addis Ababa.
Wyndham Hotel Group is not the only international company to sign management contracts in Ethiopia. Marriott, a renowned global hotel chain, manages the Marriott-Executive Apartment Hotel which was constructed by the Sunshine Investment Group, and is among the recent entrants. It will manage another property currently under construction by Sunshine – the Marriott Courtyard in the Bole Medhanialem Business District in Addis.
Other foreign companies that have engaged in management agreements include Carlson Rezidor Group through Radisson Blu, Hilton Worldwide through Hilton Addis and Starwood Hotels and Resorts through Sheraton Addis in addition to Accor Hotels and Best Western International, which made a deal with Eniy Real Estate and Great Abyssinia, respectively.
According to stakeholders, as a result of the booming hotel industry in Ethiopia, additional companies that have an interest to sign management contracts will continue to come in the future. In fact, according to the Hotel Chain Development Pipeline Survey conducted in 2014, Addis Ababa ranks third among Sub-Saharan nations for hotel rooms in the pipeline, with 1,326 planned hotel rooms, an indication that the country’s hospitality industry is fertile ground for investors.
Additionally, according to data obtained from the Ethiopian Hotel Owners Association, close to 100 hotels are in the pipeline to join the sector. At this rate, Addis Ababa will have 15,000 hotel rooms by 2020, twice the amount it currently has.
Hotel development in Africa has great economic benefits. According to the International Finance Corporation (IFC), hotels benefit developing economies because they create jobs, encourage foreign investors to do business and create infrastructure for international conferences and tourism, key drivers of foreign currency flow into these countries. Specifically, the IFC says that international hotel brands are important because “their involvement is often critical to large projects, especially in countries where the risk is high and the business environment is tough.” Additionally, “more jobs are created at higher-end hotels than in other types of tourist accommodations and visitor spending contributes strong revenues to local governments.”
This development could prove fruitful for Ethiopia, where the government aims to develop the tourism sector to get 2.5 million visitors annually by 2020. According to the World Travel and Tourism Council, the country has much to gain from the sector, which generated USD2.2 trillion and 108 million jobs globally in 2015. They estimate that nearly 4 million jobs could be created in Sub-Saharan Africa through tourism within the next ten years.
The World Bank notes that hotels and tourism have far-reaching, multifarious economic benefits, especially in developing countries: “Tourism’s main comparative advantage over other sectors is that visitor expenditures have a ‘flow-through’ or catalytic effect across the economy in terms of production and employment creation. During the construction phase of tourist accommodation and services, tourism creates jobs in that sector.”
Furthermore, they add that “[t]ourism also generates a demand for transport, telecommunications and financial services. Through consumption of local products in tourist accommodation, restaurants and food markets, and through the additional expenditures outside the accommodation, tourists stimulate demand for agriculture, fisheries, food processing, and light manufacturing products, such as the garment industry, as well as for handicrafts and the goods and services of the informal sector.”
However, in order to reap the benefits of these contractual arrangements and overall tourism development, hotels need to be equipped with capable managers, something that’s currently lacking in Ethiopia. Tewodros Derebew, Tourism Service Competence Accreditation Director at the Ministry of Culture and Tourism says hoteliers have been negotiating with foreign-based brand hotel operators regarding the absence of an indigenous management company that can handle the daily operations of international hotel chains.
“So far, the Ministry has issued a certificate of competence, which is a requirement to receive a business license, to only one management company. However, it has not been able to establish itself as a [competent] brand operator to deliver the service with the expected quality,” he says. “Most companies that enter management contracts in the hotel sector are from abroad.”
Globally, there are four types of contracts that are commonly utilised in the hotel industry. These include franchise, leasing, royalty and management contracts. Among these, management contracts are becoming widespread throughout Ethiopia’s hotel sector.
A management contract is usually a long-term arrangement between a hotel owner and hotel management company under which, for a fee, they operate the hotel. The basis of this relationship is that the operator manages the day-to-day functions of the hotel, including maintenance, front office, housekeeping, as well as handling food and beverages and sales. The management contract company also has the power to recruit and fire employees. The owner will authorise and pay for the capital project of the hotel but the responsibility of running it is assigned to the operator.
Consequently, this arrangement allows investors with relatively little knowledge and experience in the hotel industry – or who cannot directly manage hotels for a variety of reasons – to invest in the sector. Due to increasing competition, hotel investors have come to realise efficiency gains by assembling specialists that are responsible for the various components of their hotel investments. Specifically, owners frequently contract specialists to help them maximise the returns on their investments.
Yohannes Paulos has more than four decades of professional experience in hotel finance and has held senior management positions with international brand hotel operators such as Hilton and InterContinental. He says hotel owners should take all reasonable precautions and give painstaking attention to detail before signing a contract with operators: “Investors in the hotel industry require consulting not only from their legal advisors but also from hotel experts who have extensive knowledge in hotel management contracts to have a stronger bargaining position and benefit more.”
He says that in order for a stronger management culture to develop in Ethiopia, people need to better understand the intricate elements of the business. “An investor who intends to get involved in the hospitality sector should give equal emphasis to the management of the hotel from the very outset, which is not the case here in Ethiopia,” he argues. A number of investors, however, contemplate management contracts after completing construction, which he says incurs extra cost in order to meet the required standards should they sign the contract.
With this knowledge gap in mind, Yohannes has personally been consulting hotel owners while also assessing the market to establish a hotel and property management company.
Due to the dynamism in the delivery of services, stakeholders say hotel managers need to ensure a guest’s experience is central to their development efforts. “The current trend [in management] focuses on enhancing a guest’s experience through convenience and wellness initiatives,” says Manoj Kumar, an hotelier with more than 19 years of experience in hotel operations throughout Africa, Europe, the Middle East and India and is currently General Manager of Magnolia Hotel and Conference Centre, which is an upcoming four–star hotel with modern amenities.
Many insiders believe that, if developed properly, hotel management companies operating in Ethiopia could have a profound, long-term benefit on the development of the hospitality industry. Kumar argues these advantages include training modules that are key to moulding people in the hospitality industry: “The hotel operators most importantly come up with their experience and goodwill that will bring significant businesses to the country, as they have worldwide interventions.”
In addition to this, Yohannes emphasises that their presence will improve the image of the country, which translates into confidence for investors and tourists, since the loyal customers of the international hotel chains may become potential customers.
For Tesfaye Assefa, who works as a Human Resource and Training Manager at Magnolia Hotel and Conference Centre, management contracts with brand hotels benefit the hotel industry by bringing state-of-the-art technology in housekeeping, food preparation, laundry, front office and security outlets, which significantly develop the hotel’s customer service. They also introduce advanced systems that facilitate the smooth operation of key departments through the use of network software, uniform working formats, standard operating procedures, and better working cultures and principles for the hospitality industry.
Despite the promising benefits that come from management contracts with international hotel chains, Tesfaye argues that there are some negative short-term effects for small, local hotels. “High staff turnover and market shrinkage of local hotels are the major punches brought about by brand hotels and hotel operators,” he argues.
While competition from international chains may prove challenging for local hotels, the IFC report notes that these companies generally have an aggregate benefit for local businesses: “[H]otel operators generally prefer to source operating supplies (i.e., food and beverages) locally…[and] hire staff locally, if skills are available. They conduct regular in-house training and promote from within; women employees often account for the majority of jobs.”
Additionally, the potential long-term benefits of these arrangements – job creation, overall capacity building within the tourism sector, human resource training, supply chain linkages and indirect employment opportunities – will ultimately strengthen local businesses, including small hotels, through standardisation and best practices, according to the report.
Still, some stakeholders are concerned about the lack of skilled human resources that has not kept pace with the industry’s growth. One major problem contributing to this scarcity emanates from the hotel chain’s tendency to hire experienced staff rather than employing untrained individuals in the sector.
“Most of the hotels ask us to bring them well-trained professionals because few have their own in-house training programmes,” Getahun Yewendater, General Manager of Element Hospitality Management and Consultancy, told EBR last year. To fill this demand, a number of hospitality training programmes have emerged to develop capacity within the sector, including Lion Tourism and Hotel College and a hospitality specialisations at Addis Ababa, Hawassa and St. Mary’s universities, among others.
Yohannes believes the present status of local hotel operators is generally below average and incapable of providing the kind of service tourists require. “Hence, hotel operators contribute positively by influencing the actors in the industry.”
Once greater capacity within the sector is developed, he says that it may open the door for other forms of hotel development. “If there are trained and professional staffs and there are a series of trainings by reputable institutions, management contracts [may] no longer be necessary.” EBR